The Federal Reserve Bank of New York said more time is likely needed to complete changes to eliminate systemic risks in the short-term funding market.
While noting that a great deal of progress has been made in the tri-party repurchase agreement market, completion of the movement of all general collateral finance repo trades to late afternoon settlement, to avoid the need of clearing-bank credit, won’t likely be achieved this year, according to statement on the New York Fed’s website.
Since the 2008 financial crisis, the central bank has tried to strengthen the tri-party repo market, which almost collapsed amid the demise of Bear Stearns Cos. and bankruptcy of Lehman Brothers Holdings Inc. The Fed took over efforts to improve functioning of the market in 2012 after the private-sector Tri-Party Repo Infrastructure Reform Task Force, sponsored by the Fed in 2009, disbanded.
The share of tri-party repo volume that is financed with intraday credit from a clearing bank has dropped to an average 3 percent to five percent, compared with 100 percent in 2012, the New York Fed said. The Task Force’s original target was no more than 10 percent.
Repos are transactions used by the Fed’s 22 primary dealers for short-term funding and typically involve the sale of U.S. government securities in exchange for cash, with the debt held as collateral for the loan. Dealers agree to repurchase the securities at a later date, and cash is sent back to the lender, typically a money-market mutual fund.
In a tri-party arrangement, a third party, one of two clearing banks, functions as the agent for the transaction and holds the security as collateral. JPMorgan Chase & Co. and Bank of New York Mellon Corp. serve as the industry’s clearing banks.
One key remaining risk underlying in the system is the threat of fire sales, the central bank reiterated. Fed officials have pushed the industry to take steps over recent years to reduce the potential for fire sales, or forced selling of securities used as collateral in the $1.62-trillion-a-day tri-party repo market in the case of a large default.
The industry has been working toward several separate models for moving repo transactions to clearing houses, which pool capital and therefore help ensure losses at one firm don’t harm all trading partners. No finalized plans have been announced by companies looking into playing such a role, including the Depository Trust & Clearing Corp., LCH.Clearnet Group Ltd. and CME Group Inc.